guidance

Aug 3, 2019 | 18:18 GMT

10 mins read

The Weekly Rundown: A Trade War Escalation, Hong Kong Protests and a Perilous Point for the U.S. on Iran

U.S. Treasury Secretary Steven Mnuchin (left) and U.S. Trade Representative Robert Lighthizer flank Chinese Vice Premier Liu He as they pose for photographs before holding trade talks in Shanghai on July 31, 2019.
(NG HAN GUAN/AFP/Getty Images)
Stratfor's geopolitical guidance provides insight on what we're watching out for in the week ahead.

On the Record

Just remember, the Iranians never won a war, but never lost a negotiation!

                                                                                U.S. President Donald Trump


On Our Radar

So Much for a Trade Truce. Our Third-Quarter Forecast published in mid-June said, "While there is a small window for a truce between U.S. President Donald Trump and Chinese President Xi Jinping, there is a stronger likelihood that the White House will follow through on its threat to impose tariffs on remaining Chinese imports." Trump confirmed that call on Aug. 1 when he tweeted that he will apply "small" 10 percent tariffs on the remaining $300 billion in Chinese imports starting Sept. 1 because China has underdelivered on its promise to ramp up U.S. agricultural purchases and crack down on the fentanyl drug trade. Here is what we're watching:

  • China could easily turn the dial on agricultural purchases but is still waiting for the U.S. Commerce Department to come forward with details on how it will ease export restrictions on Huawei. As a gesture to Beijing to keep the dialogue open, the Commerce Department could extend a temporary license that allows U.S. companies to continue working with Huawei beyond its Aug. 18 expiration. If Trump wants to create an off-ramp from his tariff threat by Sept. 1, it will likely have to come through a U.S. move on Huawei. Otherwise, China will dig in its heels for the long fight, waiting to see how much economic and political pressure will pile on Trump in 2020 as the trade war drags on.
  • We can expect China to telegraph its retaliatory options in the coming days, which are likely to include increasing tariffs on U.S. imports, publishing an "unreliable entity" list to blacklist U.S. firms and restricting rare earth exports that are critical to the U.S. defense and tech industries. 
  • Trump is often frustrated by the concept of separation of powers in American politics, but he may end up getting exactly what he wants from the Federal Reserve. After cutting interest rates by a quarter-point for the first time in more than a decade on July 31, Federal Reserve Chairman Jerome Powell indicated that it was a prudent adjustment driven largely by global uncertainty over Trump's trade wars. Trump's escalation of the trade war with China now raises the probability of further rate cuts, which Trump hopes will keep downward pressure on the dollar to boost U.S. exports.
  • Imposing tariffs on all Chinese imports, even at 10 percent, will cover a host of everyday consumer goods such as clothes, shoes and school supplies. While Trump has considerable bipartisan support for cracking down on China overall, his tariff tactics could motivate some members of Congress to revive legislation to curb the president's trade authority.
  • The Chinese yuan is very close to depreciating past seven to the U.S. dollar under growing trade pressure. Even as Beijing is trying to avoid a sharp devaluation, the weakening of the yuan is only going to draw further rebuke from the White House amid its broader campaign to crack down on so-called currency manipulators. To that end, we're watching for the Office of the U.S. Trade Representative to publish a list of countries that it believes is abusing its self-designation as a developing country in the World Trade Organization and whether that list turns into more Section 301 investigations and trade battles.
  • Mexico, the European Union and Japan may be able to find a silver lining in Trump's tariffs on China. An escalation in the China trade war — and the potential backlash to the U.S. economy — could at least temporarily constrain the White House from moving ahead on auto tariffs and on tariffs against Mexico over border security. An Aug. 2 agreement to increase U.S. beef exports to the European Union seems to be helping to keep auto tariffs at bay for now.

Hong Kong Watch. We'll be watching to see if a citywide strike in Hong Kong on Aug. 5 shows any signs of the protest leaders being able to broaden their support base. As the protests continue and the threat of more violent disruptions lingers, Beijing has been staging massive People's Armed Police drills in neighboring Guangdong province to signal its readiness to intervene. We think that Beijing will still try to avoid intervening, calculating that the longer this drags on, the more protesters will resort to extreme tactics and thus risk alienating more Hong Kong citizens who are growing wary of the toll the unrest has taken on the business climate.

One Is the Loneliest Number. A Tory defeat in a by-election this week left British Prime Minister Boris Johnson with a majority of only one in the House of Commons, meaning Johnson could be just one vote away from losing a no-confidence vote as no-deal Brexit concerns grow closer to the Oct. 31 deadline. Facing the threat of a parliamentary coup, Johnson may preemptively call an early election in the fall to take his Brexit-at-whatever-cost message back on the campaign trail.

High-Stakes Bickering in Rome. As frictions between Italy's governing parties, the right-wing League and the populist Five Star Movement, escalate, two events next week could deepen the political crisis. On Aug. 6 the Italian Senate will vote on a League-backed package of security laws. If the Five Star Movement rejects the security measures, the League could walk away from the government. If the Five Star Movement plays along and supports the League on the security vote, the Italian government will survive another month as Parliament goes to recess. We're also watching for an update from credit ratings agency Fitch on Aug. 9 on the Italian economy, which could raise borrowing costs in Italy and exacerbate tensions between the ruling parties over how to manage the economy.

Is the U.S. Ready to Make a Deal With the Taliban? The eighth round of negotiations with the Taliban kick off in Doha, Qatar, this weekend and it's no secret that the Trump White House is anxious to extricate the United States from its 18-year war in Afghanistan so it can focus on other burning issues, like Iran and its great power competition with China and Russia. We're watching closely for any signs of a breakthrough on a landmark peace deal that would entail a timeline for a U.S. troop withdrawal, a permanent cease-fire, a Taliban counterterrorism pledge and a commitment from the Taliban to hold talks with the Afghan government. A U.S.-Taliban peace accord would pave the way for talks between the Taliban and the Afghan government, a phase that will be fraught with complications.

New Delhi Tries to Keep a Lid on Trade Tensions. Indian Commerce Minister Piyush Goyal may meet with U.S. Trade Representative Robert Lighthizer next week to defuse long-simmering trade tensions pertaining to market access, data localization and e-commerce. It will be important to watch whether any progress between the two countries can put rumors of a Section 301 investigation against New Delhi on ice. Even so, India would remain in the crosshairs of the United States in the World Trade Organization, where Washington wants to strip countries like India of special trading privileges through self-declared "developing" status.

A Narrowing Race in Argentina. Recent opinion polls in Argentina suggest that conservative President Mauricio Macri, who is seeking reelection in October, is starting to catch up with the main opposition candidate, the center-left Alberto Fernandez. Even as Macri's popularity took a big hit when he was forced to go back to the International Monetary Fund to dig Argentina out of recession, he's been able to recover in the polls thanks in part to a relatively more stable economy. Meanwhile, a proposal by Fernandez to stop paying the interest rates that the Argentine central bank pays to private banks has done little to dissipate fears among some sectors of the business class about a return to state-intervention and inflationary policies if Fernandez wins the presidency.


On Our Minds

The White House Reckoning on Iran. In seemingly contradictory moves this week, the Trump administration extended waivers for foreign companies to continue working with Iran on its civilian nuclear program and then followed through with a threat from May to sanction Iranian Foreign Minister Javad Zarif after he repeatedly rebuffed the White House's calls for dialogue. At the same time, the White House is trying to avoid driving Iran's nuclear activities completely underground, it is becoming visibly exasperated that its maximum pressure campaign is utterly failing to coerce Iran into negotiations. This is a dangerous juncture, in which the tactics (sanctions) are overtaking any semblance of a strategy (pressuring Iran toward a renegotiation of the nuclear deal). And so the cycle continues: In trying to avoid a military scenario, the White House will keep piling on sanctions as its response to Iranian aggression, but the sanctions will drive more Iranian actions in the Strait of Hormuz, leaving the United States ultimately with the responsibility to militarily deter Iran. As much as this White House tries to avoid it, a limited strike scenario is still likely in the cards.

What's Behind Beijing's Tourism Ban Against Taiwan? In a surprise announcement, Beijing decided to suspend mainland solo tourists to Taiwan starting Aug. 1. Beijing is known to weaponize tourism flows for political ends, but we're still scratching our heads in trying to understand the timing. The Taiwanese election is just six months away, and these kinds of moves could easily backfire and bolster support for pro-independence candidates calling for resistance against mainland intimidation tactics. We're watching to see if China's economic pressure tactics have any impact on U.S.-Taiwan defense deals, particularly a pending F-16 sale, and on how Taiwan ultimately shapes a new policy on tech export restrictions in the name of national security. Taiwan Semiconductor Manufacturing Co. is critical to Chinese tech supply chains and has continued to supply Huawei despite the U.S. export ban.

Crown Prince Drives Big Social Changes in Saudi Arabia. Saudi Arabia's Cabinet this week approved long-awaited amendments to the kingdom's civil status laws, including allowing women to travel without the permission of their male relatives. The social reform is supported by most of Saudi Arabia's majority youth population (over 60 percent of the country's population is under 30) and Crown Prince Mohammed bin Salman is hoping for a positive international reception after losing a great deal of credibility in the West over the past year. To his credit, Salman has proven effective so far in containing dissent from the kingdom's entrenched religious establishment. There is still a longer-term question of what more freedom for Saudi women will do to the country's demographic balance as Saudi Arabia's more liberalized Gulf peers have seen birth rates plummet in recent years. But Salman is banking that the economic benefits of integrating more women into the workforce and the social benefits of allowing a restive youth population more freedoms will bring more stability to the kingdom in the long run.


In Case You Missed It

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Vietnam's Balance Between Great Powers May Start Skewing West


On Our Calendar

Hong Kong's protest leaders have called for a citywide strike on Aug. 5. Also in the coming week, the United States and South Korea begin their 19-2 Dong Maeng joint military drill and the annual hajj pilgrimage begins in Mecca, Saudi Arabia. For more, see our Geopolitical Calendar.


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